The Icelandic Chutzpah Prize is Retired: Portes and Baldursson Win by Losing

Portes as the poster child for the failure of econometrics and neoclassical dogma

Richard Portes is the economist that the U.K.’s neoclassical economists chose to be their representative. They consider him to represent the greatest strengths of neoclassical economists in general and econometricians in particular. “Econometricians” is a fancy term for economists whose specialty is statistics. Economics is unique in that one can receive exceptional honors from fellow-neoclassical economists for proving catastrophically wrong – repeatedly and causing immense human suffering. Wesley Marshall and I are doing a book that illustrates this point by focusing on Nobel Laureates in economics, and explains the underlying pathology that has so twisted the field. Portes has not been made a Laureate, but he is a global leader among neoclassical economists. Portes’ pronouncements on Iceland have proven so wrong, so often, that they serve a similar purpose in illustrating these crippling pathologies.

His infamous November 2007 ode to the soundness of the big three Icelandic banks was commissioned by Iceland’s Chamber of Commerce and it went on at length about Portes’ accomplishments. Here is a brief excerpt to give the reader a feel for tone.

“Professor Portes is a Fellow of the Econometric Society, a Fellow of the British Academy, a Fellow of the European Economic Association, and Secretary-General of the Royal Economic Society. He is Co-Chairman of the Board of Economic Policy. He is a member of the Group of Economic Policy Advisors for the President of the European Commission; of the Steering Committee of the Euro-50 Group; of the Bellagio Group on the International Economy; and Chair of the Collegio di Probiviri (Wise Men Committee) of MTS.”

Yes, they were so sexist that they had a “Wise Men Committee” in 2007, and Portes used that phrase to describe the group. The Committee, of course, proved to be an oxymoron composed of regular morons. The Queen named him a Commander of the British Empire (CBE) in 2003 then famously asked British economists why they had missed the developing crisis.

Why Portes hates and fears heterodox scholars

Heterodox scholars have long had a special place in our hearts for Portes. Heterodox economists have the honor of being famously dismissed by Portes in his written statement (not an off-the-cuff blunder) as head of the Royal Economic Society as unworthy of being published. The context was his brief swan song praising his accomplishments over his 16-year stint running the RES delivered on March 17, 2008 as his neoclassical dogmas were collapsing and taking down much of the global economy.

Portes was so blinded by his dogmas that he saw none of this and instead lashed out at the scholars whose views were being proved correct. He went out of his way to criticize three groups of researchers who do work in economics. He claimed that “heterodox” economists are so “mediocre[e]” that they don’t write anything worth publishing. He criticized the increasing emphasis on economists seeking to “achieve multidisciplinary insights on the key issues facing business and public policy-makers.” He was distressed by those who oppose mono-methodological research. He bemoaned what he claimed was the terrible consequence of these three pathologies – decreasing emphasis on “introverted, discipline-based theoretical speculation and model-building.” The example he chose to illustrate his outrage was this passage from a referee’s report. Note that this is the context in which he takes his gratuitous swipe at heterodox scholars.

“‘[D]espite the excellence of the partners’ record within mainly economic science, they fail to include alternative, complementary or even competing approaches.’ The proposal failed. Referees like these have regrettably been taken seriously. Mediocrity is rationalised on the grounds that it it [sic] is hard for the ‘heterodox’ to publish in top journals….”

As an econometrician, Portes “knows” that econometrics is the platinum standard that is such a noble metal it should never be adulterated with other base methodologies. There are no alternative methodologies worthy of consideration. If you were trained as a social scientist rather than as an econometrician you will probably be mystified by Portes’ passion in denouncing the idea that economic articles should consider “alternative, complementary, or even competing approaches.” If you took a “research methodologies” class in grad school you were introduced to many examples of why considering “alternative, complementary, or even competing approaches” was vital to avoiding making terrible mistakes. Econometricians are taught that all other research methodologies are inferior and non-scientific. I provide examples of how Portes’ mono-disciplinary and mono-methodological chauvinism have led him to recurrent error.

Portes is the UK’s version of Larry Summers

Portes does not disdain heterodox and multi-disciplinary economists because he is deeply conservative on social issues. He created and runs the Center for Economic Policy Research (CEPR). In late 1998, Portes invited Dominique Strauss-Kahn (DSK) to give the major address celebrating CEPR’s XV anniversary and the rise of “new left” European leaders throughout Europe. DSK was then France’s Minister of Economy, Finance and Industry and a prominent European socialist intellectual.

As DSK’s celebratory address made clear, however, European “socialists,” while still progressive on many social issues, had embraced crony capitalism and the Washington Consensus with the kind of wild passion that would later make DSK infamous and cost him control of the IMF and an excellent chance of becoming the Prime Minister of France. DSK’s embrace of the financiers was exceeded in its passion by only a few economists, including Portes. CEPR is overwhelmingly funded by big banks (private and central).

The big banks and their devotees among economists have long understood that the telling critiques of crony capitalism come from heterodox scholars, particularly those engaged in multi-disciplinary research. Portes has gained wealth, fame, and power by serving the banksters’ interests. Portes’ visceral hate and contempt for us, therefore, is rational. We represent the gravest threat to his pandering to the crony capitalists through the repeatedly falsified economic dogmas that he employs to serve his clients’ interests.

President Bill Clinton and Prime Minister Tony Blair made the decision to form the “New Democrats” and “New Labour” dedicated to a political and economic alliance with the finance industry and in which the quid pro quo for their campaign contributions was an assault by Clinton and Blair on financial regulation and vigorous regulators. DSK, in his 1998 speech honoring Portes’ CEPR, lauded what he called the Clinton/Greenspan model of economics as the model European “socialists” should follow. Alan Greenspan was Charles Keatings’ lead economic expert. Keating’s Lincoln Savings was the most infamous and destructive example of an S&Laccounting control fraud. Greenspan personally helped Keating recruit the five U.S. Senators who became known as the “Keating Five” when they met with us on April 9, 1987 to try to pressure us (the federal S&L regulators) not to take an enforcement action against the largest and most destructive violation of our rules in the agency’s history. Lincoln’s violation of those rules caused massive losses and proved fatal. DSK began his political career as an activist in the Union of Communist Students. He moved from communist to championing Clinton, the president who destroyed effective financial regulation, and Greenspan, the Ayn Rand disciple and theoclassical economist who praised America’s worst financial fraud.

Greenspan is instructive in discussing Portes’ pathologies because Greenspan made the same misuse of econometrics to praise Lincoln Savings’ health in 1984 that Portes would use to praise the financial health of the three Icelandic banks in 2008. Greenspan assured our agency that Lincoln Savings posed “no foreseeable risk of loss.” It proved to be the most expensive failure of a bank in U.S. history. Greenspan and Portes were disastrously wrong because they did not understand accounting control fraud. Portes’ preferred “introverted” approach to the study of economics deliberately ignored heterodox and multi-disciplinary investigators’ findings that used other research methodologies because they knew that traditional econometric techniques will always praise the worst accounting control frauds. The abject failure of one of the world’s leading neoclassical economists to learn anything in a quarter-century despite Greenspan’s failures and the collapse of the efficient market hypothesis that was the rotten foundation of all of modern finance and much of neoclassical economists demonstrates the sad state of economics.

Portes’ well-paid propaganda on behalf of the three fraudulent Icelandic banks

The movie Inside Job made famous part of the modern saga of Iceland’s financial crisis. Robert Wade and Silla Sigurgeirsdottir, the scholars that have done the most to expose Portes, describe the key role that neoclassical economists played in praising the Icelandic banks.

“In 2006, the Icelandic Chamber of Commerce commissioned an expensive report from Columbia Business School economist Frederic Mishkin, which affirmed the banks’ stability with few qualifications. The following year the Chamber of Commerce commissioned another one from London Business School’s Richard Portes, which reached much the same conclusion. (After Iceland’s collapse, Mishkin’s report, called ‘Financial Stability in Iceland’ was re-listed on his CV as ‘Financial Instability In Iceland’. Mishkin told Inside Jobdirector Charles Ferguson that it was a typo.)”

As famous as Ferguson made Mishkin and his convenient “typo,” Portes is far more culpable because he authored his report in November 2007 over a year after the financial bubbles had burst in many nations and the crisis was raging. Portes continued his praise for the Icelandic banks into 2008 only a few months before the banks collapsed.

Robert Wade wrote a column on July 1, 2008 warning about the risk of an imminent Icelandic crisis. Wade is a prominent economist. While Wade’s column never mentioned Portes his column outraged Portes. Wade pointed out the central fact demonstrating that the Icelandic banks were out of control. “Bank assets swelled to 10 times GDP by the end of 2007.”

“The banks were privatised around 2000 in a hasty and politically driven process. Ownership went to people with close connections to the parties in the conservative coalition government, which had scant experience in modern banking. The central bank and the finance ministry were staffed at the top by people who preferred as light a regulatory touch as possible.

The banks soon extended their operations from commercial banking to investment banking. Neither they nor the regulators separated the implicit guarantees they received as commercial banks from their operations as investment banks. The extension of the safety net allowed them to take big bets at home and abroad. They operated like hedge funds, financing their expansion largely from foreign borrowings rather than domestic deposits.”

Fridrik Már Baldursson and Portes promptly fired back a personal attack on Wade dated July 4, 2008. The first line of their column was “Robert Wade gets Iceland very wrong.” The reality, of course, was that they were the ones who got Iceland “very wrong.” Their column was an embarrassing demonstration of primitive econometrics at the time it was written because of their failure to understand fraud epidemics and the resultant financial crises. Iceland was falling precipitously into a severe recession, but Baldursson and Portes wrote that “the current slowdown is welcome” even though they admitted that it had already “overshot.” They made the classic blunder of econometricians who believe the massively inflated accounting results of fraud represent reality.

“Gross debt of Icelandic households at end-2007 was high at over 200 per cent of disposable income, but their assets, including the fully funded pension funds, were over 750 per cent of disposable income.”

Wade had warned about the “Great Unwind” that was taking place as various Icelandic bubbles collapsed. It is essential to understand that the opposing columns were written over two years after the residential real estate bubbles had ceased expanding in the U.S., the UK, Ireland, and Spain and well over a year after the bubbles collapsed. By mid-2008, Iceland was the most obvious site of a series of bubbles in the world. Baldursson and Portes, however, uncritically took the reported “asset” values as if the if they represented reality. Econometricians do not understand that their methodology will massively overstate true asset values during the inflation-stage of a bubble, particularly if there is an epidemic of accounting control fraud.

They proceeded to repeat and expand their mistake when they discussed the Icelandic banks.

“Finally, the banks. In the European Economic Area, Iceland could not get away with ‘as light a regulatory touch as possible’. It has had to apply exactly the same legislation and regulatory framework as European Union member states, and its Financial Services Authority is highly professional. Prof Wade repeats the common claim that Icelandic banks ‘operated like hedge funds’. Much of the growth came from mergers and acquisitions, so the operations of Icelandic banks are now geographically and sectorally diversified. Most of their lending is abroad. For a while, their expansion was funded mainly by borrowing in international wholesale markets. But the “mini-crisis” of early 2006 forced a change. By end-2007, their funding structure was similar to their peers in other Nordic countries, in many cases with better deposit-loan ratios and maturity structures. They have had higher returns on equity and higher capital ratios than their Nordic peers. And the Icelandic banks had virtually no exposure to the toxic securities that almost all other banks did buy. These facts do not square with aspersions about people with ‘scant experience in modern banking’. Should Iceland have called on Chuck Prince, Stan O’Neal or Marcel Ospel? The rest of Prof Wade’s comments are political, including rumour-mongering. This and his carelessness with the data are regrettable in the fragile conditions of today’s international financial markets.”

Baldursson and Portes found not a single weakness or cause for concern in Iceland’s banks – at a time when they were massively insolvent and would collapse within a few months due to control fraud and were among the most dangerously run banks in the world. The banks they praised were so insolvent that they rendered the entire nation not simply insolvent, but also incapable of financial survival without a bailout.

But those errors were simply the analytical failures inherent when one relies on crude econometrics to measure the performance and risk exposure of a bank engaged in accounting control fraud. Baldursson and Portes plumbed new depths when they made claims about the bank regulators and the senior bank officers. Iceland was one of the “winners” of the international competition in regulatory laxity (which included Basel II). That competition destroyed effective regulation throughout the EU, Iceland, and the United States. Given the fact that the City of London was the global “winner” in that competition for laxity and that “light touch” regulation was infamous throughout the EU long before mid-2008 and given the fact that Icelandic financial regulators were among the most notorious cheerleaders for the industry in the world economists with even the most dismal multi-disciplinary skills who worked in the UK or Iceland would know by 2008 that financial supervision in the UK and Iceland were farcical. Baldursson and Portes were either being disingenuous in their claim that Iceland had vigorous financial supervisors or they proved that “introverted” economists lack the skills essential to evaluate banking risks.

Baldursson and Portes’ back-handed compliment to Iceland’s senior bankers (you’re no worse than Charles Prince) is another indication of dishonesty or the disabling inability of “introverted” economists who disdain multi-disciplinary analysis to make even remotely reliable judgments about economic events like management integrity, bank fraud, bubbles, and financial crises. Like Greenspan, Baldursson and Portes praised the management skills of looters. Again, econometrics was their Achilles’ “heel.” Note that what drives their disastrously bad “analysis” that leads them to praise the CEOs of the Icelandic banks is that they reported “higher returns on equity and higher capital ratios than their Nordic peers.” Yes, banks engaged in accounting control fraud report “higher returns on equity and higher capital ratios.” That is what allows the controlling officers to loot the bank. George Akerlof and Paul Romer famously called the creation of record reported (albeit fictional) profits and capital levels through accounting fraud a “sure thing” (adopting the regulators’ phrase). The title of their 1993 article said it all “Looting: The Economic Underworld of Bankruptcy for Profit.”

Baldursson and Portes ended with a personal nasty about the accurate and non-controversial points that Wade made about Icelandic political instability. They tried to make it appear that Wade was some irresponsible wild man about to prompt a run by spreading rumors.

“The rest of Prof Wade’s comments are political, including rumour-mongering. This and his carelessness with the data are regrettable in the fragile conditions of today’s international financial markets.”

Wade again proved to be correct about Iceland’s government falling. “Carelessness with the data” is the right phrase to describe the work of Baldursson, Portes, and other neoclassical econometricians who get the most important economic issues so dreadfully wrong because their “introverted” mono-disciplinary and mono-methodological practices consistently lead them to praise the worst accounting control frauds and the CEOs that loot them. Portes is the patron saint of “introverted” neoclassical economists who have caused such enormous suffering.

“They’re back!”

If Iceland awarded an annual trophy for chutzpah Baldursson and Portes would have won it so many times that they would have retired the trophy and awarded it permanently to Baldursson and Portes. They have returned to the scene of their many failures and written an article claiming that Iceland’s banks failed because their CEOs engaged in “gambling for resurrection.”

The good news is that Baldursson and Portes actually cite Akerlof and Romer (1993). It is exceptionally rare among neoclassical economists discussing the crisis to consider the role of looting (accounting control fraud). The bad news is that Baldursson and Portes do not consider the role of looting in Icelandic banks. Indeed, as I will show, their article demonstrates that they do not understand Akerlof and Romer, white-collar criminology, accounting control fraud, or financial regulation. I searched their 108 page article on my computer for key terms. It found that the words “accounting,” “loan losses,” “allowances,” “underwriting,” “documentation,” and “due diligence” never appeared and “fraud” appeared only once in a manner that misstates Akerlof and Romer and the relevant literature. Their article does not cite Wade, Wade and Sigurgeirsdottir, Ann Pettifore, or my work. Portes remains introverted and wrong. This is the sole reference in their article to Akerlof and Romer and “fraud.”

“In a worst case scenario, bankers may abandon the hope of resurrection, choosing to loot the bank by fraudulent lending practices such as lending to their own holding companies and related parties (Akerlof et al. 1993).”

That sentence mischaracterizes Akerlof and Romer’s article. Their article was intended to debunk the claim by economists that “gambling for resurrection” was the lead cause of the savings and loan debacle. Akerlof and Romer made a devastating point about economists’ “gambling” claims that Portes and Baldursson ignore.

“[M]any economists still [do] not understand that a combination of circumstances in the 1980s made it very easy to loot a [bank] with little risk of prosecution. Once this is clear, it becomes obvious that high-risk strategies that would pay off only in some states of the world were only for the timid. Why abuse the system to pursue a gamble that might pay off when you can exploit a sure thing with little risk of prosecution?” (Akerlof & Romer 1993: 4-5.)

Akerlof and Romer wrote specifically for an audience of economists and put the matter as starkly as possible. It is staggering that economists could cite their article and ignore – not seek to counter – their analysis which falsifies the gambling for resurrection hypothesis. We are talking about a Nobel Laureate in economics (Akerlof) teaming with an internationally famous economist (Romer) working with the financial regulators (who in turn were working with white-collar criminologists) and the national commission to investigate the causes of the S&L debacle in order to get their facts correct.

Akerlof and Romer went on to explain a key aspect of the environment that minimized the “risk of prosecution” and made looting far more likely.

“Neither the public nor economists foresaw that [S&L deregulation was] bound to produce looting. Nor, unaware of the concept, could they have known how serious it would be. Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better. If we learn from experience, history need not repeat itself” (George Akerlof & Romer 1993: 60).

Akerlof and Romer explained how the competition in regulatory laxity between the federal government and various state regulators produced a more criminogenic environment.

“As thrifts switched from state to federal charters to take advantage of the new opportunities, some states (Texas and California, for example) reacted by adopting even more liberal rules” (Akerlof & Romer 1993: 24).

Neoclassical economists did not “learn from experience” because their “introverted” and mono-disciplinary and mono-methodological approaches kept them from learning about the findings of regulators, criminologists, and accountants and even economists who took advantage of multi-disciplinary and multi-methodological findings.

Studies of large S&L failures found that control fraud was “invariably present.”

“The typical large failure [grew] at an extremely rapid rate, achieving high concentrations of assets in risky ventures…. [E]very accounting trick available was used…. Evidence of fraud was invariably present as was the ability of the operators to “milk” the organization” (NCFIRRE 1993).

To “gamble for resurrection” is to take a legal, but imprudent and extremely high risk in the hopes that it will produce an extreme positive return if the gamble succeeds. The greater the risk of the investment the less likely the gamble is to succeed. This means that the gambling for resurrection strategy is very unlikely to succeed. Accounting control fraud is a “sure thing” so it is a far superior strategy for unethical CEOs compared to winning only if a high risk gamble succeeds.

Akerlof and Romer repeatedly discussed the critical role that accounting paid in driving the fraud scheme and producing the sure thing (see pp. 13-42). Note that they feel the need to emphasize to their fellow economists a fact that is “obvious” – and that Portes proves that the fact is still “widely neglected” among neoclassical economists, particularly econometricians, a quarter-century later.

“We begin with a point about accounting rules that is so obvious that it would not be worth stating had it not been so widely neglected in discussions of the crisis in the savings and loan industry. If net worth is inflated by an artificial accounting entry for goodwill, incentives for looting will be created. Because net worth imposes the critical limit on the ability to extract value from a thrift, each additional dollar of artificial net worth translates into an additional dollar of net worth that can be extracted from the thrift. In particular, if the artificial increase in net worth is bigger than the total required capital, the conditions for looting will be satisfied. This possibility was enhanced because the capital requirement, c, was substantially reduced during the 1980s (Akerlof & Romer 1993: 13).

We find abundant evidence of [S&L] investments designed to yield artificially high accounting profits and strategies designed to pay large sums to officers and shareholders (Akerlof & Romer 1993: 23).

While correct accounting would have required loan-loss reserves to be set aside against the risks of loss, practice frequently differed (Akerlof & Romer 1993: 27).

Among the many provisions reducing the restrictions on asset holdings, the Garn-St. Germain Act of 1982 also allowed thrifts to engage in commercial lending and therefore to purchase junk bonds. Junk bonds offered the same kind of yield spread described in the yield curve example and exploited in Chile. Correct accounting would have required a re-serve to offset the high default rate on junk bonds, but lacking adequate supervision requiring risk set-asides, thrifts could report virtually all of the interest income on junk bonds as current income” (Akerlof & Romer 1993: 28).

Iceland operates under international accounting standards which are being interpreted in a manner contrary to their purported anti-fraud principle as forbidding the creation of loss reserves that would be required to reflect the losses inherent in the making of fraudulent loans. Iceland’s accounting rules are an open invitation to accounting control fraud, making it even more of a “sure thing” that is effectively immune from prosecution. Akerlof and Romer explained how the relevant factors interacted to produce more criminogenic environments that made accounting control fraud the dominant strategy of unethical S&L CEOs. Their explanation also introduces the subject of how to distinguish looting (control fraud) from gambling for resurrection.

“These observations illustrate most starkly the difference between the strategy we emphasize-bankruptcy for profit-and the more familiar strategies that depend on excessive risk-taking. According to our strategy, the preferred outcome for the owners of a solvent thrift is the one in which the thrift goes bankrupt. When the owners succeed in extracting more than the true economic value V*, they will exhibit precisely the kind of indifference to how the thrift is managed that one sees when one examines the daily operations of many bankrupt thrifts. According to the alternative strategy of excessive risk-taking, the preferred outcome for the owners is the one in which the gamble pays off and the thrift remains solvent. If owners were following this strategy, they would be concerned about the quality of their loans and the size of the operating expenses that they incur, because every dollar of loan loss or expense represents a subtraction from their gains if the gamble pays off. These results also justify our use of the term looting. The bankruptcy for profit strategy can induce large losses to society as a whole because the dependence of M on A can encourage thrift owners to invest in negative net present value projects (Akerlof & Romer 1993: 11).

In summary, when V* is small, or when the amount that can be extracted from firms with little chance of prosecution is large, looting and illegality are likely to occur. Regulation, proper accounting, and effective enforcement of the law are necessary to ensure that V* exceeds M*. There must be limits on legal payments consistent with true economic returns. In addition, accounting and regulatory definitions must make illegal payments easy to detect, prosecute, and recover” (Akerlof & Romer 1993: 12).

The criminology literature, which arose out of what we learned as S&L regulators, helps distinguish between legal high risk gambles and accounting control fraud. See “The Savings and Loan Debacle of the 1980’s: White-Collar Crime or Risky Business?” (with K. Calavita and H. Pontell) Law and Policy. Vol. 17, No. 1 (January 1995: 23-55).

Akerlof and Romer wrote specifically about the same issue in their 1993 article. They explained in detail why the “gambling for resurrection” theory was falsified by the facts. Note that their explanation of the critical role of underwriting , had it been listened to by neoclassical economists and regulators, would have prevented the fraud epidemics that hyper-inflated the financial bubbles and drove the financial crises that caused the Great Recession. Indeed, the passage below is uncanny in its relevance to the current crisis.

“In contrast to popular accounts, economists’ work is typically weak on details because the incentives economists emphasize cannot explain much of the behavior that took place. The typical economic analysis is based on moral hazard, excessive risk-taking, and the absence of risk sensitivity in the premiums charged for deposit insurance. This strategy has many colorful descriptions: ‘heads I win, tails I break even’; ‘gambling on resurrection’; and ‘fourth-quarter football’; to name just a few. Using an analogy with options pricing, economists developed a nice theoretical analysis of such excessive risk-takings trategies.4 The problem with this explanation for events of the 1980s is that someone who is gambling that his thrift might actually make a profit would never operate the way many thrifts did, with total disregard for even the most basic principles of lending: maintaining reasonable documentation about loans, protecting against external fraud and abuse, verifying information on loan applications, even bothering to have borrowers fill out loan applications.5 Examinations of the operation of many such thrifts show that the owners acted as if future losses were somebody else’s problem. They were right (Akerlof & Romer 1993: 5).

4. See Merton (1978).

5. Black (1993b) forcefully makes this point.”

Portes’ section on “alternative” explanations that ignores the alternatives

Portes and Baldursson have a section that purports to consider alternatives to their gambling for resurrection hypothesis.

“5.3.6 Are there other possible explanations than ‘Gambling for Resurrection’?”

Bizarrely, the section does not consider looting (control fraud) as another “possible explanation” even though it describes a series of fraudulent acts taken by the Icelandic banks’ controlling officers. Recall that Akerlof and Romer explicitly explained why any act by the bank managers that falsely inflated reported income and net worth encouraged looting. Portes and Baldursson note a series of fraudulent actions by the managers that falsely inflated reported income and net worth – and fail to even consider fraud. Instead, they label the frauds “gambling for resurrection.” The entire exposition is logically incoherent. They see frauds used to delay the collapse of the fraud scheme to allow even greater looting and then label the frauds that cover up and extend the life of the underlying accounting control fraud to allow more time for looting as “gambling for resurrection.”

Portes’ pathetic inability to admit his errors

Portes and Baldursson’s recent article on “gambling” compounds their earlier errors by claiming that “empirical” studies have now confirmed what they said in 2007-2008 about the purportedly tough Icelandic financial regulation. There is no way to conduct a valid “empirical” study of the toughness of financial supervision using the econometric techniques they rely on and their claim has been devastated by Wade and Sigurgeirsdottir’s work that documented in detail the consistent absence of vigorous financial regulation in Iceland. If Portes and Baldursson care about Icelandic financial regulation they should join Wade and Sigurgeirsdottir (and me) in demanding that Gunnar Andersen be returned to leading the financial regulatory agency.

Portes and Baldursson’s latest piece seeks to shield the Icelandic bank officers who led the control frauds from accountability under the criminal laws and resurrect Portes and Baldursson’s propaganda in 2008 claiming that the banks were sound. All of this rests on accepting the massively and fraudulently inflated valuations that the banks’ officers reported for income and net worth as reality. Portes and Baldursson continue to make the error that Akerlof and Romer warned was so “obvious” that they were embarrassed to have to point it out because economists so frequently ignored it. It is the inability to admit error that drives Baldursson and Portes, years later, to continue to take fraudulent financial statements as gospel because they would otherwise have to admit that their econometric techniques are worse than useless when there is material accounting fraud, a bubble, or both. It is not simply his preference for “introverted” economic modeling that distorts reality and causes horrific policy blunders that has made Portes one of the world’s most destructive people. It is also his sad unwillingness to admit error and learn from other disciplines and far superior research methodologies.

Portes purports to love models, but he willingly distorted and ignored Akerlof and Romer’s model for the last quarter-century because it proved his grievous errors. He shows no evidence that he has ever read the relevant criminology literature. He cannot be weaned from his crude econometric fantasies no matter how many times they prove catastrophic. The thing he will never forgive heterodox scholars for is being proved repeatedly correct. The arrogance required to denounce heterodox scholars as “mediocre” at the very moment their warnings that Portes’ prophecies were blowing up the economy were proving correct makes Portes the undisputed champion of chutzpah.

Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.